Should you lease or buy assets?
Finding money for the essential assets you’ll need to run your business efficiently can be a challenge. You’ll need to decide whether leasing or buying is best for your business.
Is borrowing money essential?
Whether you need to purchase a vehicle, some computer equipment, or a bigger warehouse to expand your business or to operate more effectively, take the time to consider how each purchase might impact your operating capital.
Think about whether leasing is the way forward. If you decide to lease an asset, you won’t have to hand over a large chunk of your business’s cash. That cash could maintain your reserves, be used to invest in more stock, or to develop a new product or service.
Sit down and calculate the potential impact to your business’s cash flow if you were to:
- Purchase each asset outright in cash.
- Lease the assets you need.
- Take out a small business loan.
By making loan repayments over time, you’ll be able to pay off a larger capital purchase that may have been impossible to afford with cash.
Paying loan installments can also make it easier to afford the assets your business needs without stripping it of its available funds.
Choosing to buy new or second-hand
It always pays to do your due diligence before you sign a purchase agreement for any new business assets. For example, the cost of machinery and equipment can vary enormously, so it’s worthwhile comparing prices of different brands, manufacturers and suppliers.
If you know that the quality of an asset will play an integral role in your overall business success, it’s probably a wise idea to purchase it brand new. Just keep in mind that you might not always be able to claim the entire amount paid as a business expense – the values of some assets are depreciated over several years.
Buying second-hand offers a way of reducing your business expenses. Take the time to shop around to see whether you can locate a used item in good condition that will be reliable.
Deciding to lease or buy
When you lease an asset, you’re simply renting it for a set period of time. The leasing company retains ownership of the asset while your business has the exclusive use of it for the term of the lease.
A lease will typically run for anything between 24 and 60 months. Once the agreement is entered into, both parties are obligated to see out the term of the lease.
Throughout the course of the lease agreement, you’ll pay the lender regular installment payments for the right to use that asset. For accounting and bookkeeping purposes, some leases can be classified in the same way as an asset purchase and can be capitalized on your balance sheet.
However, purchasing your own asset can be a cheaper option in the long run. For example, if a printer costs $5,000 and is leased to your business at a monthly rate of $200 over 3 years, once the lease period is up, you’ve paid $7,200 – and you don’t even own the asset.
Important questions to consider
Before deciding whether to buy or lease, it’s prudent to take a few important factors into account, such as:
- How long will you need the asset for? Is it for a short-term project?
- Is it cost effective? Will the extra business you make cover the expense of leasing or purchasing?
- Will the asset become outdated in the near future? For example, signing a five-year lease on a computer that will become obsolete in three years doesn’t make much sense.
- What are your current financial priorities? Are there other purchases that should be made first?
Upgrades and maintenance costs
In cases where technology is changing rapidly, you might prefer to lease the asset your business needs instead of buying it. There are also options where the lease agreement can include upgrading the asset to a newer model once the agreement expires.
Likewise, some lease agreements may also include maintenance and servicing costs. By leasing some assets, you could avoid paying any upkeep costs associated with them, saving your business money over the long term.
It’s important to look closely at any lease agreement before you sign it. You may find that some agreements:
- Give you the opportunity to purchase the asset at a reduced cost when the lease expires.
- Allow you to exchange the asset and upgrade to a newer model when the lease expires – as long as you enter into a new agreement at the same time.
Always be sure that you understand the terms of an agreement before you sign it. It’s also smart to run a cost comparison and a cash flow analysis between leasing an asset and buying one with funds from a small business loan.
Ways to fund your asset purchase
There are always different options available for funding your business’s asset purchases, including:
- Outlaying cash or capital you have within your business.
- Using a small business loan.
- Employing a revolving line of credit.
- Entering into a lease agreement to help fund the acquisition.
If you decide to buy, always check with your accountant about any planned business asset purchases. Discuss the potential impact the purchase may have on your cash flow and ask what alternative options might be available.
- Sit down with your accountant to discuss the cash flow implications of purchasing new or second-hand business assets.
- Speak with your bank manager about funding options for new assets.